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Quantum Foods dishes up tasty trading update

Quantum Foods, which produces commodities such as poultry, eggs and animal feeds, has seemingly been too bland to appeal to a market raised on richer fare in the JSE’s food sector.

But the Wellington-based group on Wednesday dished up a hearty trading update that forecast markedly higher headline earnings of 156c per share for the financial year ending September. That’s a big number at bottom line – especially if one remembers that Quantum hit a 12-month low of 250c in October 2017.

The trading update’s earnings forecast puts Quantum on a forward earnings multiple of 2.75 times, which suggests the market expects the new financial year to be less extraordinary.

The past year saw the group’s egg business crack huge profits after production shortages (thanks to the outbreak of avian influenza) saw prices soar.

The trading update notes that high levels of profitability continued in the egg business – but Quantum added that margins declined with an increase in feed costs and a (subsequent) decline in prices.

Bottom line was also helped by the proceeds of a R22m insurance claim that compensated the group partly for the avian influenza losses that transpired in 2017 and the first half of 2018.

There’s no doubt the 2019 financial year will see a meaningful "normalisation" of Quantum profits. But whether this means this lean and mean food commodity business deserves to trade on such a desultory market rating is debatable.

Perhaps sentiment will get back on the boil if Quantum – which has already undertaken a sizeable share-buy back — decides to serve up a chunk of its bumper 2018 profits as a special dividend?

There may be merits in listing specialised real estate companies instead of large diversified companies that own a mix of property types such as office, retail and industrial.

But fund managers will only be prepared to put money into specialised funds that already have a good track record and do not need large amounts of money to reach a stage where they are able to compete with established counters.

Stor-Age stands out as a specialised fund that has been a success since it listed in November 2015. The company, the only self-storage services group on the JSE, has grown its portfolio from R1.3bn at listing to more than R5bn. It has also made promises that it has kept.

CEO Warwick Lucas, who started the private storage business with his brother and father about a decade ago, started developing a long-term acquisition plan from the get-go. It is now the largest storage property owner in SA. As much as 70% of its R5bn portfolio is local, with the remainder in the UK.

The group has also created an advanced operations platform that it uses for its assets here and abroad. Compare Stor-Age with other specialised groups that have tried to come to market without clear strategies or assets of a high enough quality. Over the past two years there was talk of several specialised student accommodation listings coming to market. These haven’t materialised and critics believe that in some cases they were poorly run and merely attempting a listing to gain access to capital.